Computerized Calculations

Computerized calculators for retirement planning often not very accurate

Janet Kidd Stewart
April 19, 2009

If you've talked with a financial adviser about retirement planning or waded through an online calculator, chances are you've answered questions about your income and assets and received a snapshot of the type of retirement you're on track to achieve.

But just how accurate are the computer models that make these calculations? Not very, some advisers say.

At a retirement conference sponsored by Investment News recently, a few advisers complained that technology providers haven't come up with better modeling software, despite years of pleas.

"It's a frustration we hear a lot," said Linda Strachan, a senior vice president with EISI Inc., maker of NaviPlan, a popular planning software for advisers.

She said some planners are befuddled by technology upgrades that are confusing to implement or contradict results from earlier versions of the software. Some want only a big-picture analysis with easy-to-read graphics, while others crave detailed reports that factor in every assumption, from market volatility to inflation, she said.

Charles Farrell, an adviser with Northstar Investment Advisors in Denver, shuns the computer simulation software altogether and instead builds historical returns into a basic spreadsheet.

Most simulation programs (commonly known as Monte Carlo analysis) don't apply well to financial markets because of the markets' unpredictability, Farrell said.

Some advisers "rely too heavily on the outputs," he said. "They focus on median returns, not the outliers, and the outliers are much bigger than anyone realizes."

Many programs, for example, provide a percentage probability that a given portfolio will last throughout someone's retirement. For years, advisers have targeted a 90 percent probability of success for their clients.

That's too low, Farrell said, using the analogy that if air travelers were told they had a 10 percent chance of a crash, no one would get on a plane.

So what's a saver to do?

• Be skeptical.

Whether you've spent five minutes on a Web site tool or five hours talking to a retirement planner, realize no model can tell you whether your portfolio can withstand all future events. If someone tells you they have that answer, find a new adviser. Learning to live with some uncertainty may be your strongest retirement strategy.

•Look under the hood.

Find out what assumptions went into the model. What inflation rate did it use? What level of asset correlation, or the degree to which different asset classes move together, were assumed? Does it factor in optimum Social Security strategies among couples? For do-it-yourselfers, check out the range of assumptions included in the models at esplanner.com.

• Examine who is behind the numbers.

Joel Bruckenstein, publisher of Virtual Office News, a technology newsletter for advisers, suggests working with an adviser with a fiduciary responsibility to put your interests ahead of their own. They're more likely to use the most robust technology and actually know how to interpret the data, he said. The adviser programs receiving the best industry reviews are NaviPlan, MoneyGuide Pro and Money Tree, he said.

• Consider Plan B.

Ask what the contingency plan is if things don't work out as projected. This is where advisers truly earn their keep by building an income plan that can withstand a broad range of markets, and where products such as annuities and insurance come in.

•Embrace the unknown.

Ask to look at a range of possible outcomes and worst-case scenarios using different assumptions, then use that range as a reminder about the uncertainty of the forecast.

"No society has ever tried to have a large percentage of its population living off savings," Farrell said. "It's hard to do, so you have to recognize the uncertainty and not get anchored to a number" or draw-down strategy, he said.

Asking for several possible outcomes and strategies for each helps people understand that a rosy picture in retirement is great, but they need a plan to control spending in case it doesn't happen.